I received a thoughtful commentary on the auto industry crisis from knowledgeable
reader Joe H., who works in the industry.

Since I have no deep knowledge of the auto industry to share, I'll try to
add some perspective. Before we get to Joe's astute comments, I would note:

1. It's easy to be cavalier about the situation--no bailout, etc.--but since
hundreds of thousands of jobs are at stake I think it behooves us to consider
matters carefully before announcing "what's best for the country."

As someone who suffered from the huge swings in construction spending/employment
1973-1993, I have experienced the sinking feeling one gets when one's livelihood
vanishes. There will be a lot of suffering regardless of bailout or not, and
we need to be aware that this is not just dollars and cents but people's lives.

2. It seems abundantly clear that there is massive over-capacity in the global auto
industry; the industry can make millions more autos than there is demand for.
All the major manufacturers are global companies, and there is some truth in
the observation that Ford and GM could shutter their entire North American operations
and go on as non-U.S. global manufacturers.

From a global perspective the manufacturers have little choice but to cut capacity
in the weakest markets for their products. If that happens to be North America,
then it is simply prudent management to cut capacity to match demand. Borrowing
billions from the government, or receiving a "gift" of billions will not change
this business reality.

While it's easy to demonize globalization, it is undeniable that all auto manufacturers
build factories near their markets for a variety of reasons both financial and political.
So to blame "globalization" is somewhat specious when the entire industry
is globalized. If you cannot make a car for X cost and sell it profitably in another
country for a profit, then it makes no sense to make cars for that market.

In other words, we want all the benefits of globalization--low
cost goods, cheap international airfares, and so on--but we want all the jobs
to stay in the U.S. It doesn't work like that. If you want to maintain domestic
industries with trade barriers, you cannot expect to get the low prices of globalization.

3. The American consumer is highly indebted and therefore a poor credit risk. To
the degree that autos are sold with little money down, high-interest loans,
then we can foresee a large and long-lasting decline in auto sales regardless of the quality of
the vehicles or the wishes of consumers for new vehicles. This is reflected by
Nissan sales dropping as much or more as GM's sales. Honda and Toyota
sales also declined by over 30%.

4. As the Wall Street Journal noted, not all domestic manufacturers are
on the edge of insolvency:
America's Other Auto Industry :
There is such a thing as a profitable car maker in this country.

5. The American public rallied against the first $700 billion TARP bailout of
the banking industry 100-to-1; supposedly the sharp decline in the stock market
changed many minds. In any event, Congress passed a $700 billion giveaway with
few if any actual dividends to the U.S. taxpaying public. Now a bailout of
about 5% of the TARP bailout (number one of what, five? Six? Twelve? I've lost count of the banking/mortgage bailouts) is
proposed for the Big 3 and the uproar exceeds the one surrounding the TARP bailout
which blew away 20 times more taxpayer funds. This is not to say I agree with
the auto bailout, but it's a good idea to place it in proper context.

6. The Japanese, Korean and German auto manufacturers with plants in the U.S. buy
most of their parts from U.S. suppliers, and their factories are staffed by U.S. workers.
This begs the question of why Big 3 autos are losing favor with consumers.

OK, here are Joe's comments:

I am torn regarding the US auto industry bailout. Full disclosure is in
order. I work for General Motors.

I want to highlight a few perspectives that have been lost in the clamor.

Point one:
Max Bazerman writes a great deal about negotiations and their
limitations. One of those limitations is that key stakeholders refuse
to accept any solution that is arrived at quickly and easily.
Stakeholders believe that negotiators must crawl over a mile of broken
glass and shed a gallon of blood before the maximum/optimal solution can
be negotiated.

The US auto industry, both management and labor, are well versed in the
literature and the practical application of negotiating. US Congress is
no slouch at the practice either.

---I have no inside information, so what follows is pure speculation---

One possible sequence of events would be for Congress to stiff the US
auto industry once again. Then, the US auto makers would be compelled
to conserve cash by ceasing operations until Congress resumes session in
2009. That is, it is conceivable that GM, Ford and Chrysler could lay
off every employee on their rolls for the last three weeks of the year.

Between 50% and 75% of an automakers' cost of producing a car or truck
is in the purchased parts. Ceasing production is dumb because you get
slaughtered by your fixed costs. "Fixed" costs are often accounting
charges to properly meter out cash out-flows that were made in the past.
Day-to-day cash conservations is mainly a creature of variable cost
management.

Would it hurt the car companies? GM has $25B or $30B of inventory on
dealer lots. Ford and Chrysler also have huge supplies of cars and
trucks. We could hold our breath for a long, long time.

Merry Christmas!

Retail would puke. A three week "trial bankruptcy" would provide the
mile of broken glass and the retail crash-and-burn would provide the
gallon of red ink, ah, blood.

Point two:
Sloan Management Review published an article in the late 1980s (sorry,
cannot remember the authors) that discussed The Cost Spiral.

Traditional economics very conveniently divides costs into two
categories. Variable costs scale up proportionately with volume and
down with volume. Fixed costs are fixed; that is, they do not change
with volume.

The classic example is the pizza parlor. Your rent for the building is
fixed. You pay $1500 a month whether you make zero pizzas, one pizza or
1500 pizzas that month. Your cost for materials (dough, sauce, etc.) is
a variable cost. The material cost for making 1500 pizzas is 1500 times
greater than the material cost for making one pizza.

The Cost Spiral article exposed the classic division of costs as a lie.

At some point in the production, your rented space is not large enough
to accommodate the volume of business. You may need to rent a larger
space and rent another pizza oven when demand is 1600 pizzas a month.
That is, fixed costs act as fixed on the down-side but function as
variable costs on the up-side.

A similar phenomena occurs with variable costs. Every variable cost
strives to mutate into a fixed cost. It is as almost a law of
nature...much like salmon swimming upstream to spawn. Labor craves
stable cash flow so they demand Unemployment insurance. Suppliers seek
to lock you into long term contracts. Girl-friends want to become
wives. Additionally, the laws of supply-and-demand jack up prices when
demand is high. So variable costs are super variable on the up-side and
"sticky" or act as if fixed on the downside.

The UAW had a great deal of time to make labor, a cost traditionally
identified as "variable", a sticky cost. They negotiated Supplementary
Unemployment Benefits (take-home pay of about 80% of 40 hours take-home,
for 48 weeks) and JOBS bank protections. Some of their internal logic
was that if labor was a fixed cost, then management would be highly
motivated to find real work for them. Plainly stated, management's
ability to manage costs that *should* be variable costs has been
nullified by UAW contractual language.

Each trip through the business cycle causes another accretion of fixed
costs that ratchet up and variable costs that sticky down.
Cycle-after-cycle, the arteries narrow and the organization becomes less
robust, less able to rebound from external stresses.

Point three:
Congress realizes that many Americans are envious of UAW represented
auto workers. Many Americans are envious of line workers making 2 times
the going freight for similar work. They are envious of the worker
protections. They are envious of SUB pay and JOBS bank.

UAW workers have been their own worst enemy. A few, maybe fifteen in a
thousand, have been know to go into BBQs, bars, and Bar Mitzvahs and
BRAG how they have screwed the company. Those same few BRAG about how
little work they do. They BRAG about what a crappy job they do. It is
a mystery to me that the other 985 don't collar them in the parking lot
and "paint a couple of dots" on their faces.

Congress realizes that it is against Anti-Trust laws for businesses to
share business plans with their competitors. Sharing business plans is
called collusion. But that is what Congress chided the US auto industry
leadership for failing to do when they testified before Congress in
November. That is patently disingenuous.

Still, it comes down to the Max Bazerman observation that key
stakeholders believe that optimum solutions are forged in the smithy of
hell. My guess is that I will have a front row seat.

Thank you, Joe, for a thought-provoking essay on the situation.

Reading Joe's comments made me wonder just how much a role our adversarial culture
plays in this crisis. After all, unions and management fighting it out in bloody
screaming combat is considered "normal" or as Joe suggests, even required.

Our entire legal structure is based not so much on justice (though it's a good
principle to establish) but on adversaries duking it out in court. The truth is
never the goal--winning the case by convincing the jury or the judge that your
position is stronger than your adversaries' position is the goal.

Just how culturally bound this adversarial perspective truly is can be revealed
by comparing the Japanese auto industry with the U.S. industry.
I think executives and workers alike at Toyota in Japan would be quite confused by
the management and union behavior in the U.S. It would literally make no sense
to either group in Japan to strangle the company's competitive advantages.
I suspect the Japanese might view this adversarial approach as a form
of slow seppuku--ritual suicide.

The results of this adversarial approach are now painfully visible. I've engaged
in a spirited debate over various auto-industry issues with my friend G.F.B., and
I will mention one point on which we disagree--a point which I think illustrates just
the sort of cultural divide I am exploring.

I proposed to G.F.B. that the UAW might have done better to focus on improving the
quality of the vehicles they make rather than squeeze more benefits from management via
negotiations. G.F.B. disagreed:

The union is not in charge of quality control, design, marketing nor direction
of the company.
The union does not control the design of the cars, and the build quality
tolerances that are set by the manufacturers.
The guy on the assembly lines job is do his job well. The UAW's job is to protect
and try to improve the life of the guy working on the assembly line.
The company management's job is to focus their energy on making cars which will
last 20 years. Clearly, they don't think that it important as you do.

(I had suggested that Detroit would be in a better position if they made cars which
lasted as long as the Japanese nameplates made in the U.S.)

G.F.B.'s position is perfectly reasonable in the context of standard U.S.
labor/management relations, and indeed many analysts see virtually all the
problems as managerial; but for context, read this excerpt from:
How Detroit Drove Into a Ditch:
The financial crisis has brought the U.S. auto industry to a breaking point,
but the trouble began long ago. Paul Ingrassia on disastrous decisions, flawed
leadership and what the Motor City needs to do to survive.

On Aug. 20, 1979, 18-year-old Brad Alty, fresh out of high school in Mechanicsburg, Ohio, was driving his Gremlin to work when the car broke down. He was two-and-a-half hours late to his first day on the job at a new motorcycle factory that Honda Motor was opening in central Ohio.

For the next few weeks, Mr. Alty and his 63 co-workers did little but sweep floors and paint them with yellow lines. Then they started building three to five motorcycles a day. And at the end of each day they would disassemble each bike, piece by piece, to evaluate the workmanship. Mr. Alty hated it, and he kept getting grief from his older brother for working for a Japanese company. "I thought I had made a mistake by going to work there," he recalled recently. "It was like, 'What the heck am I doing here?' "

But Mr. Alty stuck with it, and Honda stuck with him. Honda's real goal was to build cars in America, but the motorcycle plant allowed it to test the mettle of American workers for a modest investment. The workers passed the test. Honda started building Accords in Ohio in November 1982. Ironically, some U.S. Honda dealers actually protested that they wanted to sell only Accords made in Japan. But the quality of the Ohio-made cars was soon confirmed.

Perhaps the UAW leadership tried to influence management to pursue smarter
planning and to focus on higher quality as a long-term strategy to retain UAW jobs; it would probably take an insider's information
to know all that transpired over the past 20 years in the industry.

But I still wonder if some measure of Detroit's structural woes--and perhaps of
the U.S. economy's structural woes--are not linked to the adversarial model
of our society.

Eduard Morgan sat in his wheelchair looking at a laptop on the kitchen table.
A household wireless unit connected to a two-way home satellite system fed his
browser with the latest news. He and a handful of other residents in his gated
community were among the small minority of people in their city who still had regular
access to the internet. Given the cityís frequent power outages and cable thefts
outside his secure subdivision, household usage of the internet had dropped from
its national peak only a few years ago.

The internet was well on its way to reverting back to its original users within
the walls of government, education, and large corporations. Even without the loss
of physical infrastructure supporting the hard-wired, few could afford it given
the economic situation. The two-way home satellite system was a luxury even in
Eduardís neighborhood, but he still had some personal connections from his past
professional career that cut him a good deal.

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